Consumer spending improved in the second quarter

Economic Outlook Developments

  • Consumer spending improved in the second quarter, but sluggishness in the rest of the economy kept GDP growth slow. Growth is expected to continue, but at a slower pace than in 2014 and 2015.
  • After being suppressed by historic declines in energy prices, inflation is expected to return to historical norms, but with significant divergences between services and goods.
  • Brexit will likely exert a new slowing force on already challenged European and international economies.
  • Interest rates are expected to remain low, but with a gradual upward trend in the next year.
  • High debt levels remain a long‐term risk globally.

Consumer spending surged at a 4.2% annualized rate in the second quarter, but GDP was only able to edge upwards at a 1.2% annual rate as virtually all areas of GDP outside of the consumer were weak for the quarter overall. The second quarter report also coincided with the annual U.S. Census revisions to past GDP growth, which brought significant downward revisions to recent quarters. Hence, the 4‐quarter percent change in U.S. real GDP was only 1.2% ‐‐ the lowest annual change since Q2 2013. On a quarter to quarter basis, fixed investment declined at a 3.2% annualized pace during the second quarter, marking the third consecutive quarter of decline for the key indicator capital spending. Three of four major categories of fixed investment decreased during the quarter. Even more striking, gross private investment plummeted an eye popping 9.6% during the quarter, as a necessary but sharp correction in inventories pared back GDP growth significantly and unexpectedly. Export volumes edged higher during the second quarter, although as discussed in the following report the fundamentals for export growth in the next year remain weak. Government purchases from the private sector declined after a recent slow growth trend.

Even resurging residential investment declined as transition from multi‐unit to single unit residential investment appears to have begun.

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